terça-feira, 18 de novembro de 2014
Barry Eichengreen: The bond market’s dance over European debt will not last forever
The dismal third-quarter growth figures for the eurozone last week underscore, once again, doubts about the sustainability of sovereign debts. Yields on Spanish, Irish and Portuguese government bonds last spiked in mid-October as investors took fright at prospects for the world economy and the implied cost of borrowing for weaker eurozone countries jumped. The question is whether they are about to do so again.
To look at the official European strategy for managing debt you would think it was aimed at keeping the problem going for as long as possible. The plan is for governments to run primary budget surpluses with the goal of bringing down the debt-to-gross domestic product ratio to a tolerable 60 per cent by 2030.
The implied surpluses are mind-boggling. Under reasonable assumptions about growth rates and interest rates, the average annual primary surplus for the decade ending in 2030 would exceed 4 per cent for Spain, 5 per cent for Ireland, Italy and Portugal, and 7 per cent for Greece. Put simply, no country can run such monumental surpluses for such extended periods without inciting a taxpayer revolt.
Well, almost no country. Since the mid-1970s there have been just three cases of countries that have run primary surpluses as large as 5 per cent for as long as 10 years.
One is Norway, starting in 1995. The country ran large surpluses during the period of maximum oil and gas production, salting away revenues in its sovereign wealth fund. A second case is Singapore, starting in 1990. The city-state has an exceptionally strong executive and, as a very small, open economy, is highly susceptible to global shocks. These singular circumstances compelled it to save revenues for a rainy day. But its circumstances, like those of Norway, have no relevance to Europe today.
The third case, Belgium starting in 1995, might seem more pertinent. But there too circumstances were unique. The second half of the 1990s was when the decision was taken to create the single currency. Belgium had to show that it was committed to bringing down its debt in order to qualify for membership. Not qualifying would have been a disaster for an EU founding member whose economy was closely connected to those of Germany and France.
The story of Belgium’s large primary surpluses raises the question of why others, Italy for example, did not behave likewise. The explanation lies in the institutional reforms that Belgium put in place from the 1980s onwards, in anticipation of the need to sustain large primary surpluses.
It reformed its tax code, expanding the tax base and lowering top marginal rates. It empowered the Federal Planning Bureau to issue independent budget forecasts. It constrained spending by regional governments. It restructured the High Finance Council, giving it a clear mandate to monitor and co-ordinate fiscal policies between the federal and regional levels.
The timing of these actions, plus the fact that the large primary surpluses disappeared not long after Belgium succeeded in adopting the euro, point to the importance of the combination of strong external pressures and robust domestic institutions.
Are the circumstances confronting Europe’s heavily indebted governments today at all similar? To be sure, those governments face strong external pressures from the bond market. But they also face strong internal pressures from voters, who are unlikely to sit patiently for 10 to 15 years while 5 per cent of national income goes to pay off the debt of previous generations. The countries in question clearly lack the strong fiscal institutions needed for this task.
The implication is that Europe’s official strategy for resolving its debt crisis will not work.
Fortunately, there are feasible alternatives – or at least in theory. One is to grow the denominator of the debt/GDP ratio. The effective debt burden can be reduced by growing the economy and thus government revenues. This would expand the states’ capacity to service their obligations. But sadly growth cannot be conjured up out of thin air. European policy makers have shown an inability to conjure it up any other way.
The other alternative is debt restructuring. European officials continue to dance around the idea of writing down public debt, promising Greece lower interest rates and longer maturities but denying the need for more fundamental restructuring and for applying such measures more widely. The events of recent weeks make clear that they will not be able to dance much longer.
Barry Eichengreen is professor at the University of California, Berkeley and University of Cambridge. This column is based on research undertaken together with Ugo Panizza